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22 April, 2009

Government scraps ethnic equity rule in some sectors

The Government has lifted the 30% Bumiputra equity condition on 27 services sub-sector with immediate effect, kicking off an on-going liberalisation of the sector which is already a stable contributor to economic growth.

The move marks a dilution of the country's politically sensitive affirmative action program, which aims to uplift Malays who are a majority but lag economically.

Prime Minister Najib Razak said full foreign ownership will now be allowed in 27 areas spanning health and social services, tourism, transport, business and computer-related services.

Analysts hailed the opening of the services sector as a positive move but said the liberalization should be expanded to cover key services sectors such as banking and telecommunications. The Malay ownership rule still applies in these sectors.

Prime Minister Datuk Seri Najib Abdul Razak also gave notice that he will announce the liberalisation of the financial services sector next week.

The liberalisation initiatives are in-line with the country’s compliance with its membership in the Asean Economic Community and the World Trade Organisation.

Najib said the liberalisation of the services sector -- in the areas of health and social services, tourism services, transport services, business services and computer and related services -- will not adversely affect the domestic services industry as the Government will continue to help build capacity and to open up export markets.

Critics say the decades-old New Economic Policy hinders investment and has largely benefited well-connected elite Malays rather than the poor. But the government has been unwilling to scrap it for fear of alienating the Malays who form the main constituency of the ruling party.

It has, however, allowed 100 percent foreign ownership in the manufacturing sector, a key pillar of the economy.

The country, said Najib, is planning to raise the contribution of the services sector to 60% of the Gross Domestic Product (GDP).

He said in terms of export, the service sector contributed RM102.1 billion while imports amounted to RM99.8 billion for the year 2008.

"In 2007, for the first time, Malaysia recorded a surplus in its services trade and likewise in 2008."

The services sector contributed 55% to the GDP in 2008, of which 47.6% was contributed by non-government services. The sector accounts for 57% of total employment.

Approved investments in the services sector totalled RM50.1 billion in 2008, exceeding the investment target of RM45.8 billion per annum. The share of foreign investments was 11 % of the total investments and is expected to increase with the liberalisation.

Hitherto, foreign services companies such as retailers need a local partner who owns 30% equity in the business.

The policy has seen Malaysia slip in Foreign Direct Investment (FDI) rankings, according to United Nations data.